CPSE ETF: What Is It, Benefits, Risks & How to Invest

When you think about investing in public sector companies, the first thought that comes is to purchase individual stocks. But there is an investment tool that allows you to get exposure to a basket of selected Central Public Sector Enterprises through a single investment: the CPSE ETF.

In today’s blog post, we will give you an overview of the CPSE ETF along with the key benefits of investing in it. 

What is CPSE ETF?

CPSE ETF full form is Central Public Sector Enterprises Exchange Traded Fund; it is an equity-oriented ETF that primarily invests in a basket of central public sector companies. By investing in the CPSE ETF, investors can allocate their portfolios across various central public sector companies. It is a passive investment approach, and the fund manager tries to post returns similar to the CPSE index. This ETF was launched in 2014 as a part of the Government of India’s disinvestment programme. This fund is managed and operated by Nippon India Mutual Fund. This ETF is listed on stock exchanges and traded like any other stock.

Features of CPSE ETF

The key features of CPSE ETF are as follows:

• Diversification: By purchasing only one unit of CPSE ETF, one gets exposure to a basket of CPSE companies. This reduces the overall concentration risk in the portfolio.
• Traded Like a Stock: The CPSE ETF is an ETF; therefore, it is traded like a common stock on the exchange. One can easily buy and sell the CPSE ETF on the exchange during market hours using their demat and trading account.
• Exposure to Multiple Sectors: The underlying stocks of CPSE ETFs operate in different sectors of the economy. This allows an investor to get exposure to multiple sectors.
• Passive Investment: CPSE ETF works on a passive investment approach. The fund manager, instead of choosing the best CPSE stocks, directly invests in the index constituents.

How Does CPSE ETF Work?

The CPSE ETF works in the following manner:

• Collection of Investor Money: Investors purchase CPSE ETF units through the stock exchange using their demat account. The pooled money from investors is managed by the fund manager of the AMC.
• Investment by the Fund Manager: The fund uses the pooled money to invest in the CPSE stocks. The investments are made according to the index’s composition and weightage.
• Tracking Index: The ETF tracks the index and posts returns in line with the benchmark.
• Rebalancing of Portfolio: The underlying index of the CPSE ETF is rebalanced periodically based on the weightage of its constituents. Therefore, in a similar manner, the fund manager also rebalances its portfolio.
• Buying and Selling of Units: Investors can easily buy and sell the units of CPSE ETF on the stock exchange like any other stock during market hours.

How Does CPSE ETF Track Public Sector Companies?

The CPSE ETF tracks the public sector companies in the following manner:

• Eligible CPSEs: The Nifty CPSE consists of central public sector enterprises listed on the stock exchange. These companies are identified by the exchange.
• Weightage of Index: The companies of the CPSE index are assigned a particular weightage based on index methodology. The CPSE index invests in these companies based on the weightage of the index.
• Performance Tracking: The performance of ETFs is monitored against their benchmark. The objective is to minimise the difference between the ETF’s performance and that of its benchmark. 

Read Also: What is Equity ETFs?

Benefits of Investing in CPSE ETF

The key benefits of investing in CPSE ETF are as follows:

• Diversified Exposure: One can get a diversified exposure to a basket of CPSE stocks through a single investment. This reduces the overall risk of the portfolio.
• Convenience: As the units of CPSE ETFs are traded on the stock exchange, one can easily buy and sell such units during market hours.
• Transparency: The CPSE follows a passive investment approach and defines an index methodology, therefore making it easy for an investor to understand the portfolio.
• Flexibility: Traditional mutual funds are bought and sold at NAV, which is declared by the AMC later. But ETFs are traded on the stock exchange; one can place market and limit orders.
• Lower Cost: CPSE ETFs are a low-cost investment option. It is a passive investment option; therefore, it is cheaper than actively managed equity funds.

Risk of Investing in CPSE ETF

The key risks of investing in CPSE ETF are as follows:

• Market Risk: The value of CPSE ETF can change according to the stock market movement. When the share prices of the underlying securities of CPSE ETF fall, it can significantly impact the NAV or price of the ETF.
• Concentration Risk: The CPSE ETF invests only in selected focused stocks of CPSE instead of the entire universe of stocks. If the few large constituents have significant weightage, their performance can impact the performance of the portfolio.
• Tracking Error: The key objective of a CPSE ETF fund manager is to replicate the performance of the CPSE index. But the returns of the underlying index may not match the fund because of factors such as fund expenses, transaction costs, cash holdings, etc.
• No Guaranteed Return: Investment in CPSE ETF does not guarantee assured returns. Therefore, those who can bear volatility in their portfolio can consider investing in CPSE ETF. 

How to Invest in CPSE ETF?

One can easily invest in CPSE ETF through their demat account, and the steps are as follows:

1. Visit the Pocketful website: An investor is required to visit the website of Pocketful and click on the Open Demat Account tab.
2. Open a Demat Account: On the page, fill in your details and add your bank account.
3. Login: Once your demat and trading account is opened successfully, log in to the trading application provided by Pocketful.
4. Adding Funds: You need to add funds to your demat account so that you can purchase the CPSE ETF. You can add funds through various online methods such as UPI, NEFT, RTGS, etc.
5. Searching for CPSE ETF: In the watchlist, you can search for the CPSE ETF and enter the quantity you wish to purchase.
6. Placing Order: After entering the quantity, you can place the buy order.
7. Monitoring: Regular tracking of your portfolio is required to monitor the performance of the CPSE ETF to book profit in a timely manner.

Things to Consider Before Investing in CPSE ETF

The key factors that one should consider before investing in CPSE ETF are as follows:

• Understanding the Index: The CPSE ETF tracks the Nifty CPSE Index. Before investing, understand the methodology, eligible companies, their weightage, etc.
• Risk Appetite: CPSE invests in equity-related instruments, and its returns are market-linked. Its price can fluctuate because of stock market movement. Hence, investor who can bear volatility in their portfolio can opt for investing in CPSE ETF.
• Investment Horizon: The prices of CPSE ETF may fluctuate in the short run. Therefore, investors who have a longer investment horizon can invest in CPSE ETF.
• Tracking Error: CPSE ETF tries to replicate the performance of its underlying benchmark. But its returns may differ from those of the index because of the expense ratio, cash holdings, etc.

Read Also: What Is Nifty ETF?

Conclusion

On a concluding note, investing in Central Public Sector Enterprises is an interesting way to create wealth in the long run, and by investing in a CPSE ETF, one can get exposure to a basket of selected CPSE companies by purchasing only one unit of this ETF. But it is an equity investment; therefore, its value can go up and down based on the performance of underlying securities, market, and economic conditions. Another factor is tracking error that can significantly impact the performance of the CPSE ETF. Therefore, it is advisable to consult your investment advisor before investing in the CPSE ETF. 

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